Private Company Financial Reporting Committee

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Private Company Financial Reporting Committee
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Outline

• Background of Formation of Committee
• Committee Charter
• Prospective Projects
• Meeting Highlights
• How you can participate

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Private Companies Financial Reporting Committee

• Latest effort by the profession to address needs
  of private companies
• Long history of task forces, committees and
  research leading to this point
• Important because the full support of FASB is
  behind this effort

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1974- AICPA Committee on GAAP for Smaller and/or
Closely Held Businesses

• Was CPA focused
• CPAs said user needs not met and financials too
  complex for users.
• Recommended differential disclosures- same
  measurement and recognition.
• FASB complied in certain standards- e.g. Earnings
  per share

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1981- Special Committee on Accounting Standards
Overload

• Recommended that FASB reconsider certain
  standards
• FASB simplify standards by avoiding complex and
  detailed rules
• Promote/elevate income tax basis as substitute
  for GAAP
• Differential recognition and measurement
• Triggered FASB research study

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1983- FASB- Invitation to Comment Financial
Reporting by Private and Small Public Companies

• CPAs perceive lenders needs differently than
  lenders do
• Creditor needs and decision-making processes are
  basically the same for private and public
  companies
• Users need complete GAAP financials that are
  audited or reviewed
• Cost/benefit equation differs based on company
  size

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1983 Study Findings

• 60 of practitioners supported different
  measurement in certain instances, financial
  managers split, 9 of users supported
• GAAP financials important tool for banks even
  though they can get info directly from companies
• FASB formed Small Business Advisory Group as
  sounding board

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1996- AICPA Special Task Force on Standards
Overload

• Focus group of CPAs concluded that there was a
  standards overload problem
• Recommended increased small firm involvement in
  standard setting process (including
  representation on FAF and FASB
• Literature simplification and codification
  (FASB-AICPA agreement on CD-ROM licensing
• Disclosure guidance for OCBOA financials

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2005- Report of PCFR Task Force

• Attributes of GAAP reporting have high value
  according to constituents
• Too many GAAP-specific requirements lack
  relevance or decision usefulness
• Majority of each of constituent groups who had an
  opinion believed it would be useful if underlying
  accounting in GAAP reporting were different for
  public vs. non public

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2005 Report Conclusions

• GAAP for private companies should be developed
  based on concepts and accounting that are
  appropriate for the distinctly different needs of
  constituents of that financial reporting
• Fundamental changes should be made in the current
  GAAP standard setting process to ensure that the
  financial reporting needs of private company
  constituents are met

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May 2005 AICPA Council Resolution

• AICPA hereby supports the development of high
  quality GAAP for privately-held, for-profit
  entities based on concepts and accounting that
  are appropriate for the distinctly different
  needs of constituents of private company
  financial reporting, and
• Council instructs AICPA management to work with
  the FAF and FASB to identify and implement a
  process to develop GAAP for privately-held
  entities, which would result in recognition,
  measurement, and disclosure differences, where
  appropriate, from current GAAP as applied by
  public companies.

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FASBs Take on Events

• Leadership was listening to its constituents from
  all quarters
• Commitment to ensuring that GAAP meets the needs
  of users
• Figure out the best way forward

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Joint FASB/AICPA Proposal

• Title Enhancing the Financial Accounting and
  Reporting Standard-Setting Process for Private
  Companies
• New dedicated Web site
• pcfr.org
• Comment period ended 8/15/2006

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Focus

• Consideration of user needs and costs/benefits to
  determine whether differences in GAAP for
  recognition, measurement, presentation,
  disclosure, and effective dates are needed for
  private companies

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Process Enhancement Elements

• Improvements to current FASB processes
• Private Companies Financial Reporting Committee
  formed January, 2007
• Funded by FASB

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FASB Processes Related to Private Companies

• FASB staff provides FASB Board with possible
  alternative solutions for private companies
• FASB Board (and resulting basis for conclusions)
  explicitly addresses consideration of differences

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PCFRC

• Chair selected by FASB
• Chair selects committee members
• Committee consists of 4 users, 4 preparers and 4
  practitioners from various size companies/firms
• Users are two commercial lenders, one surety and
  one venture capitalist

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Our Constituency

• Limited to Private, For Profit Entities

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Committee Charter

• Committee members as individuals serve as a
  resource to FASB, EITF and FASB staff during
  research phase before an ED is developed
• Committee makes formal recommendations to FASB on
  prospective standard setting activities
• Committee makes formal recommendations on
  existing standards

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Committee Charter

• Committee sets its own agenda
• Committee meets in public to deliberate and reach
  conclusions
• Committee makes formal recommendations to FASB
• Motion to set forth recommendations to FASB
  requires affirmative vote of two thirds of
  committee members

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Committee Meetings

• Committee will meet 4-6 times per year
• Meetings will be held around the country to allow
  constituents to observe
• Part of each meeting set aside for observers to
  comment
• Highlights of committee meetings posted to
  website

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Projects- FASB Pipeline

• At May meeting PCFRC discussed the standard
  setting activities ongoing at the FASB and
  decided to address the projects listed below.
• International Convergence
• Certain PCFRC members will monitor this project.
• Liabilities and Equity
• Task force formed to address this project.
• Financial Statement Presentation
• Task force formed to address this project.

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Projects- FASB Pipeline

• Leases
• Task force formed to address this project. PCFRC
  will initially focus on the scope of this
  project.
• FASB 133 Hedging
• The PCFRC has an interest in this project and
  certain committee members will monitor this
  project.
• Business Combinations
• Task force formed to address this project.

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Projects- FASB Pipeline

• Small- and Medium-Sized (SME) Entities
  (IASB-related)
• The FASB can arrange an in-depth briefing on this
  project from the IASB. Certain PCFRC members
  will monitor this project.
• Revenue Recognition
• This project is further out on the horizon.

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Subsequent Events

• The objective of this FASB project is to
  establish general standards of accounting for and
  reporting of events that occur subsequent to the
  balance sheet date
• Existing requirements currently contained in the
  auditing literature- need to move to FASB
• Project also considers whether certain minor
  differences between U.S. GAAP and the
  corresponding international financial reporting
  standard could be eliminated or minimized.

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Subsequent Events- PCFRC Recommendation to FASB

• PCFRC recommends that FASB require private
  companies to disclose in a policy note to the
  financial statements the cut-off date in which
  subsequent events were considered by management
  for purposes of subsequent events analysis and
  disclosure.
• PCFRC recommends that the FASB stay the course on
  its current tentative decision not to converge
  with international accounting standards related
  to refinancing of short-term obligations and
  curing breaches of borrowing covenants.

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PCFRC Recommendations on Proposed FSP-154-a

• Considering the Effect of Prior-Year
  Misstatements When Quantifying Misstatements in
  Current-Year Financial Statements
• 1. Extend effective date for fiscal years ending
  AFTER 12/15/2007

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154-a Recommendations

• 2. Remove requirement that provides for differing
  transition approaches depending on how entity
  previously evaluated materiality
• 3. Remove references to SAB 99
• 4. Disclosures to reconcile retained earnings
• 5. FASB exercise caution in bringing public co
  regulations to private companies

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PCFRCS Agenda for Existing GAAP

• FIN 48
• FIN 46R
• FASB 123R
• FIN 48 was selected first because of the upcoming
  effective date.

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User Needs

• User members of the PCFRC walked the PCFRC
  through the processes they use to make lending,
  investment, and bonding decisions
• The PCFRC discussed what the needs are of users
  of private company financial statements, how to
  identify those needs, and how those needs drive
  the demand for financial information.

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Next Meeting

• July 26-27 in Denver
• Will begin work on FIN 48 and FIN 46R
• Meeting open to the public
• Meeting materials posted to website three weeks
  prior to meeting
• Website www.pcfr.org

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How Can You Participate?

• Become a member of our Resource Group- sign up on
  website and receive notification of meetings and
  meeting summaries
• Resource Group will be tapped for special task
  forces and input on projects
• Attend meetings and speak during open mike
  session
• Email chair with ideas and opinions

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Your Thoughts

• In your opinion, what are the top two existing
  GAAP standards that the new Committee should
  consider for different GAAP?
• If you have given it any thought, what would be
  your different accounting for each of your top
  two?

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Questions?

• www.pcfr.org